Federal Reserve Chairman Jerome Powell raised concerns about the future availability of mortgages in parts of the United States, predicting that certain regions may face difficulties in securing home loans due to the growing crisis in the insurance industry. During his semiannual testimony to Congress on Tuesday, Powell warned that in 10 to 15 years, some areas could see limited access to mortgages as insurers and banks withdraw from high-risk regions, particularly those prone to coastal storms and wildfires.
The ongoing climate crisis, with increasing natural disasters, has led many insurers to cancel policies, citing multibillion-dollar losses. For instance, State Farm cancelled thousands of policies in Los Angeles’ Pacific Palisades neighbourhood, which was later ravaged by wildfires. As insurance companies pull back, prospective homebuyers in high-risk areas are often forced to turn to state-designated insurers of last resort, which may offer higher premiums and less coverage compared to traditional insurers.
Powell noted that banks and insurers are unlikely to continue providing loans and coverage in the face of increasing evidence of disasters. He emphasised that this trend could create significant challenges for homebuyers, particularly in regions where the insurance market becomes unsustainable.
Powell also addressed broader housing market issues during his testimony, acknowledging the short-term affordability problem but noting that the long-term housing affordability challenge stems from a lack of supply—an issue beyond the Fed’s control. He suggested that even if interest rates were to fall, it was not clear that it would lead to reduced housing inflation, as rising demand could counterbalance the impact of lower rates.
When discussing Fannie Mae and Freddie Mac, Powell indicated that while the government’s backing of the mortgage giants helps keep mortgage rates low, it is ultimately up to Congress to decide whether to release them from conservatorship, with the possibility of returning housing finance to the private sector over time.
